Internet Road Shows - Consider Copyright ^[1]
Micalyn S. Harris, Winpro Inc.

The SEC has recently provided no-action letters to several on-line commercial services which propose to offer issuers the ability to transmit "audio-visual recordings of live road shows" to the computer terminals of "representatives of institutional investors and investment advisers, sales and trading personnel from firms participating in the offering and securities analysts."^[2]

Historically, road shows have been oral presentations to institutional investors and investment advisers. Expensive and often elegant affairs, they have required representatives of the offering issuer, together with underwriters' representatives, to travel to several cities, arrange for meeting rooms, and provide appropriate amenities. Any written materials passed out during these meeting must be collected from attendees to avoid the possibility that such materials will be deemed a "prospectus" and thereby required to meet the requirements of Section 2(10) of the Securities Act. Because these presentations are oral and strict controls are traditionally imposed on printed materials leaving a road show meeting room, the presentations are not deemed prospectuses, and thus, issuers and their underwriters have considerable freedom in making these presentations persuasive without the lengthy disclosures which are required to be included in a prospectus.

Internet road shows contemplate transmission of audiovisual recordings of live road shows. In that respect, they will be "oral communications", but the means of communication is not ephemeral. The audiovisual recording will consist of an oral presentation reduced to a tangible medium. Using various technologies to transmit both audio and visual messages to viewers' computer terminals, service providers are offering arrangements pursuant to which companies can make their road shows available to authorized viewers on a delayed basis. "Live" transmission is promised when technology makes such transmissions possible. In the meantime, the transmissions may include still photographs and graphics to provide visual interest and information to accompany the audio transmission.

In addition to the "scripted" presentation, at least one service provider seems to anticipate including the questions and answers presented during the live road show in its internet version.^[3] Looking toward the future, it appears that "streaming" technology would permit "live" internet transmission of the road show, and two-way streaming technology would permit authorized viewers to submit questions electronically and have them answered in the same fashion. Subsequent (post real-time) viewers could then have access to those "e-mailed" questions and answers.^[4]

The SEC's no-action letters indicate that the audiovisual road show will be a somewhat "polished" version of the oral presentation because the service providers have reserved the right to edit out dead time. On the theory that perpetuating errors is undesirable, service providers have also reserved, on behalf of the issuers and underwriters, the opportunity to edit out misstatements and mistakes. While the SEC staff has indicated reluctance to permit issuers to edit out mistakes, on the grounds that the electronic road shows should be as much like the original as possible, the undesirability of continuously publishing erroneous information makes it likely that some method of correcting errors will be permitted. One alternative is to permit issuers to add scrolling corrections across the screen as the original version's audio is sent. Another possibility is to add an "addendum" similar to what might be said at the end of a meeting if the error were caught before the meeting concluded.

The SEC has issued no-action letters to service providers offering internet road shows to authorized viewers who agree to pay the service provider a fee, either as part of a broader subscription or on a pay-per-view basis. The arrangements described in these no-action letters contemplate that any special expenses incurred in the service provider's attending, recording, and transmitting the road show would be dealt with in separate arrangements between the service provider and "content providers" (the issuer or sponsoring underwriters).

The SEC's no-action letters to service providers appear to rely heavily on the fact that the service providers will take effective steps to qualify authorized viewers and prevent those viewers from performing the electronically- delivered road shows. While at least one service provider claims to have technology which will prevent viewers from "downloading" road shows onto their equipment, alternative methods of copying are readily available, and supervision will be virtually impossible. Therefore, it appears that both the service providers and the SEC are relying primarily on good faith and contractual undertakings to assure that internet road shows are not copied or redistributed by viewers.

Service providers are comfortable relying on inviting underwriters' knowledge of authorized viewers. Underwriters base their invitations primarily on their past experience with these viewers as trustworthy and reliable.

Traditionally, issuers also have relied on the good faith and good judgment of persons attending road shows, but at live road shows, issuers and underwriters send out invitations, and know attendees or the entities they represent - by reputation if not personally. Where a road show is presented electronically, there is no face-to-face contact, and at least one service provider has indicated it plans to offer access to electronic road shows to subscribers which the service provider will qualify.^[5] This is a change from current practice. Currently, the sponsor of the road show, usually the lead underwriter, issues invitations.

Where the service provider "invites" subscribers, its limited relationship with the issuer may insulate the service provider from liabilities arising from failure to adequately screen and qualify invitees. Whereas issuers and underwriters are "in it together" when it comes to liability for breach of the federal securities laws, the service provider has no such explicit liability. The contract between the issuer or underwriters and the service provider regarding recording and electronic delivery of the road show may not include viewers, who may have separate contractual arrangements with the service provider. Issuer and underwriters are likely to be third party beneficiaries of viewers' obligations to service providers regarding undertakings to refrain from performing electronically delivered road shows.

With oral road shows, surreptitious recording and distribution has not been a problem. The ease with which high-quality recordings all of electronically distributed road shows can be made and performed may, however, present new temptations.

Copyright may offer issuers and underwriters as joint holders, or issuers as copyright holders and underwriters and service providers as licensees, some additional protection against unauthorized performance. Such protection, and even the threat of its assertion, may reduce concerns relating to unauthorized performance by viewers where such unauthorized performance results in allegations of failure to comply with the federal securities laws (e.g., because there is a general solicitation in connection with an offering intended to be exempt under a private placement or Rule 144A exemption).

Copyright subsists in original works of authorship in fixed or tangible medium, which explicitly includes audiovisual works and sound recordings.^[6] Arguably, such works also fall within the protections of the Berne convention, thus extending protection of copyrights to cross-border transmissions. Copyright gives the copyright owner (which, in most circumstances, will be either the issuer or the issuer and lead underwriter jointly) the exclusive right to reproduce the copyrighted work, including the right to display the copyrighted work publicly. Subject to "fair use,"^[7] anyone performing an electronically delivered road show without the copyright owner's permission would be guilty of copyright infringement, for which the copyright owner would (if infringement can be proved) be entitled to damages.

Explicit reliance on copyrights could be implemented in several ways. One approach would be to grant a limited license to the service provider by imposing contractual obligations on the service provider to (i) acknowledge issuer's and underwriters' copyrights and (ii) include, in its contracts with authorized viewers, a similar acknowledgment. The service provider's contract with authorized viewers might also require viewers to acknowledge that issuers and underwriters will be irreparably damaged by unauthorized performance and will have a cause of action against the viewer who breaches its obligations not to perform. Additional terms might include an acknowledgment of these obligations as direct obligations to issuers and underwriters. Viewers might also be asked to agree to service of process and issuer's choice of forum if they infringe issuer's copyrights by unauthorized performance of the electronically-delivered road show. While issuers might assert all of these rights without an explicit license to the service provider contingent upon obtaining undertakings and acknowledgments from viewers, constructing direct obligations of viewers to issuers and underwriters may put the latter in a stronger position than they would otherwise enjoy as third party beneficiaries of the contract between the service provider and each viewer.

By granting the service provider a limited license to perform the road show under specified conditions, including imposition of required conditions on viewers, issuers would also give themselves a cause of action against the service provider who fails to obtain adequate undertakings from its authorized viewers, as making the road show available in the absence of obtaining specified undertakings from viewers would be beyond the scope of the license and thus violate the holder's copyrights Service providers who seek exclusive rights to perform a particular road show might also benefit if, as licensees, they could assert copyright infringement as a cause of action against persons violating their contractual obligations to the service provider to limit performance. The contract between the licensor and the service provider should deal explicitly with who has the right to enforce the copyrights. Depending upon the terms of their arrangements, both copyright owner and service provider-licensee may have a cause of action for copyright infringement against unauthorized persons who gain access to their road shows and subsequently make unauthorized performances available. (Such access would presumably be a breach of security, which could also expose unauthorized persons to more serious penalties, including possibly, criminal penalties under the Electronic Communications Privacy Act).

In the U.S., it is now necessary to register a work with the Patent and Trademark Office, within a reasonable time, in order to sue for copyright infringement. Copyright notices appropriate for performance of unpublished works are not required to establish U.S. copyrights, but problems of evidence and proof may be eased when copyright notices are visible. Traditionally, copyrights (which inhere from the moment of inception of a "creative work") have been registered only when long-term dissemination is anticipated. Road shows have a limited life in terms of their interest, and some underwriters have insisted that the audiovisual tapes of road shows be destroyed in order to prevent future reference to them. On the other hand, copyright registration is simple, straightforward, and inexpensive. If the fact of unauthorized copying or performance is proved, the result is infringement,^[8] and remedies for infringement can be sought under the copyright laws. These remedies include actual damages and any additional profits of the infringer, or statutory damages "in a sum of not less than $500 or more than $20,000 as the court considers just" which a court may in its discretion increase to a sum of not more than $100,000.^[9]

Such use of the copyright laws is unprecedented (and therefore, untested). Based on its copyrights, however, the copyright holder (issuer, underwriter, or both, jointly) could reasonably argue that any fines, attorneys' fees and costs of investigation arising from an alleged violation of the federal securities laws (because reliance on an otherwise available exemption has been vitiated), together with costs of any remedies imposed (e.g., registration) constitute "actual damages" resulting from infringement. On that basis, the copyright holder might seek recovery of these costs under the copyright laws. As copyright holder, one might also argue that fees, commissions, and profits resulting from the purchase and sale of the offered securities garnered by an infringing broker-dealer constituted "additional profits" which are also recoverable under the copyright laws. The tactic is novel and the outcome uncertain. Nevertheless, the possibility of persons providing unauthorized performances having to pay such damages might motivate all involved to take extra precautions to avoid unauthorized performance of internet road shows.

Using the copyright law, however, would involve submitting a copy of the copyrighted work, which is retained on file in the Patent and Trademark Office. Accordingly, the possible advantages of registration must be weighed against the possible disadvantages, such as unfriendly use of a road show in connection with a shareholders' derivative suit. The decision to register, however, can be delayed for a "reasonable time", thus providing an opportunity for review in the light of some hindsight.

Copyright cannot provide a guarantee of good behavior on the part of viewers of on-line or electronically delivered road shows, but copyright notices can provide additional warning of an issuer's, underwriters' and service providers' rights, and explicit assertion of copyrights opens the possibility of additional causes of action and remedies if these rights are violated.

FOOTNOTES

1Copyright 1998, Micalyn S. Harris. All Rights Reserved. Cite as: Micalyn S. Harris. "Internet Roadshows: Consider Copyright," 2 wallstreetlawyer.com No. 2, July, 1997.

2See e.g. Incoming letter dated October 22, 1997, attached to SEC No-Action Letter Re Bloomberg L.P. (October 22, 1997); see also Re Net Roadshow, Inc. (July 30, 1997).

3See Incoming letter dated December 18, 1987, attached to SEC No-Action Letter Re Internet Capital Corp. (ICC)

4Streaming technology is currently available, but the equipment and software to send and receive it is more elaborate than most computers currently include. Even if service providers have or were willing to acquire the technology, most of their customers do not have it, and therefore, such technology is not currently being used for Internet road shows.

5See Incoming Letter dated December 18, 1997, attached to SEC No-Action Letter Re Internet Capital Corp. (ICC)

617 U.S.C. Section 102 (6) and (7).

7See 17 U. S. C. Section 107

817 U.S.C. Section 501

917 U.S.C. Section on 504